The Trump Tax Trap: Can New Yorkers Escape It?

Urban Matters talks with James Parrott

On Jan. 16th, Governor Andrew Cuomo will present New York State’s proposed budget for the coming fiscal year. Earlier this month, in his State of the State address, he previewed some possible major tax overhauls designed to offset the potentially punishing blows to State finances resulting from the recently passed Federal tax bill, with details to follow in the budget. Urban Matters asked James Parrott, director of Economic and Fiscal Policy at the Center for New York City Affairs and an observer of many State budget battles, for his views on what can and should happen now. He expresses skepticism about some of the governor’s proposed tax changes, and suggests an alternative tax fix.

UM: First, let’s quickly review the dollars and cents effects on New Yorkers of the new Federal tax law.

Parrott: The tax cut is lop-sided; despite record income and wealth polarization, it nevertheless bestows the bulk of tax cuts on the wealthiest among us. It repeals the Affordable Care Act’s individual health insurance mandate, which is expected to increase substantially the number of uninsured Americans, and increase insurance premiums for millions of others. It will add up to $1.5 trillion to the national debt over the coming decade. And Republican Congressional leaders will use the resulting river of red ink to press harder to cut food stamps, Medicaid, Medicare, and other programs benefitting children and the vulnerable. They’ll go after every strand of the social safety net.

The tax law also ruptures a decades-old Federal-State fiscal partnership, by severely limiting the deductibility of State and local taxes.

Households in New York State’s richest 1% will see tax cuts totaling more than $8 billion in 2019 from the corporate income tax reduction and from the new 20% deduction for pass-through business income that largely flows to hedge fund managers and real estate investors. Those with the largest estates will pay $800 million less in taxes. Those cuts exceed the total tax cuts received by 95% of all households in the state.

But the reality is that many middle-and upper-middle income New York families, including some in the top 1%, will pay more in Federal taxes as a result of the new cap on deductibility of state and local taxes included in the new tax law.

UM: Cuomo has painted that tax law as a dire threat to New York’s economic future. What’s your take?

Parrott: Normally, increasing the Federal deficit boosts economic growth. However, since most of the tax cut is either in corporate tax cuts or for rich recipients of pass-through income, the stimulus effect this time will be muted. The corporate profit share of national income already has risen in recent years without increasing business investment or job growth, and giving tax cuts to the very richest does little to boost consumer spending. In a University of Chicago Business School survey of prominent economists, 37 of 38 felt the new tax cuts would provide little economic boost. And this was without assuming draconian budget cuts to the safety net that are a near-certainty at this point.

Even without additional stimulus, the New York City economy is likely to continue its reasonably healthy job growth, with inflation-adjusted wages and incomes rising across the board in 2018, partly due to the continued increase in New York’s minimum wage. The Upstate economy could use some stimulus, but don’t expect any from the Trump Administration or the current Congress. The biggest near-term economic risks are likely to come from steep Federal budget cuts or from actions by the Federal Reserve to raise interest rates to cool the economy down.

We shouldn’t lose sleep over concerns some will raise about “tax flight” from New York because of additional local tax burdens arising from the Federal tax bill. New York is a high-tax state, and this “threat” has been around for years. If there’s been a resulting exodus, you can’t detect that in the aggregate numbers, which show that thousands keep coming to New York because the opportunities are so great here.

UM: So what’s the big-picture outlook for the State budget?

Parrott: New York State is facing a revenue shortfall-induced budget deficit in the coming year. Some of that deficit, it ought to be said, is the result of Albany’s own previous corporate, estate tax, and middle-class income tax cuts. Given that Federal aid accounts for one-third of the State budget, flexibility will be needed to craft a balanced budget.

UM: What about the various tax changes Cuomo has proposed, including creating a State payroll tax in lieu of the current State income tax, and treating contributions to State government as fully deductible “charitable” contributions?

Parrott: The governor is absolutely correct in characterizing the Federal tax bill as grossly unfair to politically “blue” states like New York because of the limitation on state and local tax deductibility. However, I’m skeptical about suggestions to institute a State payroll tax or a charitable contribution substitute to somehow offset the loss of that deductibility. I think both of these alternatives are highly problematic, complicated to administer, and would be too disruptive to the State’s mildly progressive personal income tax structure. The overall New York State and local tax system is fairly regressive, with the State personal income tax helping to moderate the regressivity of both local property taxes and also the State and local sales tax.

On the other hand, we shouldn’t lose sight of the fact that many very rich New Yorkers will benefit from a substantial net Federal income tax cut. The State may have no choice but to do something that Cuomo hasn’t mentioned yet: Levying a charge to recapture a portion of the Federal tax windfall going to recipients of the pass-through and corporate tax cuts. This new charge would be temporary until vital Federal budget commitments are restored at some future date. This would also have the virtue of helping to offset some of the regressivity of our State and local tax system.

UM: Didn’t the governor also mention in his State of the State presentation the possibility of taxing “carried interest,” a type of pass-through business income received by many hedge fund and private equity fund managers? How likely do you think it is that New York would adopt something along those lines?

Parrott: I think that Albany should definitely re-visit that and it makes sense to use a multi-state approach as the governor suggested. Ending the preferential tax break accorded to carried interest is something about which many tax experts and business people, including Donald Trump as a Presidential candidate, have agreed on. It makes no sense that recipients of carried interest should pay a lower tax rate than what middle class families pay on wages and salaries. Hopefully, the governor will follow through on that suggestion.

UM: Last question. What role can New York City Mayor Bill de Blasio play in this new tax and budget landscape?

Parrott: Both the mayor and the governor have appropriately criticized the tax cut bill and warned of the danger of the steep Federal budget cuts that could follow. To stave off the worst effects of those cuts, the City should start by curbing the personal income tax credit it provides to millionaires against payments under the City’s unincorporated business tax (most of these payments are based on pass-through income). Albany would have to approve that tax credit change but the more the City can do for itself, the less help it will need at the State Capitol. The City will certainly have its hands full shoring up holes blasted in the budgets of City agencies, the Housing Authority, and the public hospital system by Federal budget cuts in housing, health care, and children’s services.

James A. Parrott is director of Economic and Fiscal Policy at the Center for New York City Affairs at the New School. This article was originally published by Urban Matters on January 10th 2018.

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